Farming Characteristics

Commercial rice field

Relatively few non-contract households engage in commercial production of rice (29%
compared with 89% of contract farms). It is interesting to note that the average commercial
plot of non-contract households producing rice for sale is 1.43 ha, significantly larger than
the average 1.11 ha of contract farmers (Table 2 [ PDF 14.5KB | 1 page ]). This may imply that the few commercial
farmers not under contract are more specialized in commercial production, while contract
farmers are farmers in transition to commercial farming.

The majority of surveyed households plant multiple varieties of rice in their commercial plots.
In addition to primarily producing organic Japanese rice for Lao Arrowny, some contract
farmers also produce CR203 rice under contract with the Beer Lao Brewery Company. This
suggests that once farmers become familiar with contract farming through one firm, they are
more likely to enter into contract farming with another firm. Both types of farmers typically
also plant small amounts of traditional varieties to sell to traders or in the local market.

Rice price

Contract farmers received significantly higher prices than non-contract farmers. Under the
contract, farmers received an average price of 1,911 kip per kg for organic Japanese rice.
For other varieties of rice, there is no significant difference in the prices received by contract
and non-contract farmers, as rice sold outside of the contract is sold at market prices. Due to
the premium price for Japanese rice, the average rice price for all varieties was 1,587 kip/kg
for contract farmers and 1,344 kip/kg for non-contract farmers.

The higher-than-market price offered by Lao Arrowny was ranked by 62% of contract
farmers as the most important factor influencing their decision to join the contract.

Yield

In addition to receiving higher prices, farmers under contract also had significantly higher
yields than non-contract farmers. Contract farmers' average yield for all varieties of rice is
3,272 kg/ha, compared with 2,603 kg/ha for non-contract farmers. The yield difference
between contract and non-contract farmers likely reflects the higher intensity and efficiency
of production under contract. As stated previously, farmers under contract have better
access to inputs and technology, as the contracting firm provides technical assistance and
supplies in-kind credit for high-yield seed and fertilizer.

Costs

On average, farmers under contract have higher cash costs than non-contract farmers,
spending 1,290 kip to produce one kilo of rice compared with 936 kip/kg. Contract farmers
also have higher total cash costs per hectare of rice field (2.2 million kip to 1.8 million kip);
however, this difference is not statistically significant.

Material costs

Contract farmers have significantly higher (cash) material costs than non-contract farmers,
averaging 1,474 thousand kip/ha of rice field compared with 920,000 kip/ha. The difference
was also significant for material costs per kilogram of rice production (852 kip/kg compared
with 462 kip/kg). For both contract and non-contract farmers, fertilizer is the largest material
expense. Contract farmers, however, have significantly higher fertilizer costs, spending on
average 814,000 kip/ha, compared with 528,000 kip/ha for non-contract farmers.

Similarly, contract farmers also have significantly higher seed costs than non-contract
farmers, both per hectare (283,000 kip/ha compared with 81,000 kip/ha) and per kilo of rice
production (192 kip/kg compared with 41 kip/kg).

On average, contract and non-contract farmers do not differ significantly in the use of
compost, pesticides, irrigation, or machine rental cost (Table 3 [ PDF 14.4KB | 1 page ]).

Labor structure

Commercial production under contract is significantly more labor intensive than production
outside of the contract, requiring an average of 147 days of labor per hectare compared with
88 days per hectare for non-contract farms (Table 5 [ PDF 22.8KB | 1 page ]). In terms of labor composition, family
labor accounts for 80% of contract farms' total labor and 67% of non-contract farms' total
labor. The amount and cost of hired labor does not differ significantly between contract and
non-contract farmers. On average, the cost of hired labor for contract farms was 783,000
kip/ha, compared with 792,000 kip/ha for non-contract farms. Contract farms used slightly
more female hired labor than non-contract farms, although the difference is not significant.

Although they have higher costs than non-contract farmers, contract farmers are
compensated by higher yields and price premiums. As a result, contract farmers are
significantly more profitable than farmers outside the contract, earning an average of
2,924,000 kip/ha of rice field, compared with the 1,751,000 kip/ha earned by non-contract
farmers.

Comment(s)

Thank you very much for this publication that analyzes in-depth the impacts of contracts on adopters' livelihoods.

You write: "contract farmers would have lower profits than non-contract farmers if they operated outside of the contract." and you deduce from this finding that "better-off farmers choose to produce independently rather than taking on the burden of fulfilling the requirements of a contract." I think it is important to mention that this deduction is only valid in the context of contract arrangements that include a provision of credit to contract farmers.

In the context of my PhD, I conducted a study of contract farming for eucalyptus in Thailand. Contracting companies, which are using eucalyptus wood for pulp and paper production, do not provide credit to contract tree farmers. Based on an household survey of 450 eucalyptus tree farmers, I found that better-off farmers are more likely to adopt a contract because they have the financial capacity to comply with the terms of the contract (such as a minimum rotation length).

Axelle Boulay, PhD scholarAustralian National University

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.